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Why the U.S. needs a Value Added Tax
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Swelling deficits and an aging population leave few palatable options when it comes to taxes.
The best choice by far would be the creation of a new value added tax — a “money machine” that can bring in huge sums with relatively little effort. America is alone among rich nations in not charging a VAT, and its continued unwillingness to do so will make it harder to cope with the fiscal challenges ahead.
Giving birth to a new tax will certainly not be an easy sell. The stunning 1980 reelection defeat of Al Ullman, the powerful chairman of the House Ways and Means Committee who had advocated a VAT, is still a warning to American politicians.
The timing of a new tax on consumption may also seem suspect. Aren’t we supposed to be getting Americans back into the malls?
VAT, however, is worth the risk. It could yield enough money to pay for healthcare reform, as well as a meaty cut in income tax and a reduction in the deficit. It could also be done without destroying Obama or the Democrats.
Unlike taxing the rich — which has emerged as a favorite strategy of many Democrats — a VAT is extremely easy to collect. This is partly because it is gathered from each producer in a chain.
Take bread. The farmer, miller, baker and grocer all pay their share of the tax. If the grocer cheats, the government loses only a quarter of its tax. Furthermore, each producer has incentive to make sure its suppliers have paid VAT. The miller becomes liable for the farmer’s share of VAT unless he can prove the tax has already been paid. VAT collection polices itself to a large extent. The sums of money that could be raised are immense, making it easier to strike a political compromise. Exactly how lucrative VAT would be depends largely on which goods are exempt.
Canada, for example, gives up about a third of potential revenue by excusing food, drugs and transportation from the tax. Even if the United States did the same, a 10 percent tax rate could raise $500 billion a year, according to Eric Toder, an analyst at the Tax Policy Center.
Raise the rate to 15 percent and you get $725 billion. (In comparison, income taxes are expected to yield $968 billion this year.)
This might be hard to square with President Obama’s commitment not to raise taxes on anyone making less than $250,000 a year. VAT is a regressive tax — eating up a larger share of the income of lower wage groups.
This could be offset through the income tax system. In addition, there would be a natural counterbalance if the tax were used to fund an expansion of healthcare. With current health proposals expected to cost around $100 billion a year, there would be plenty of money to spare.
Obama could also borrow a trick from Margaret Thatcher, who used the proceeds from almost doubling VAT to slash British income taxes. A 15 percent VAT would give Obama tremendous leeway to simplify a Byzantine income tax system and to cut rates.
And introducing a VAT need not derail economic recovery. Indeed, if the tax were introduced with a six-month delay it could even provide Americans with an incentive to bring forward spending.
America cannot temporize forever. The aging population will demand both painful spending cuts and tax increases. If the burden is placed on income taxes alone then any increase in rates will be monumental.
When politicians finally confront the looming fiscal crisis, a VAT would be an invaluable tool.
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The Wall
I can’t believe you want yet another tax. I am tired of being the goverments personel piggy bank. They should cut wastefull spending and programs that don’t work. I aslo believe a income tax is all that we should have because it is based upon a persons ability to pay.
Really? We can raise more money with more taxes? Oh wait, it’s just another way of hurting our crippled manufacturing sector. That’ll be great for business, forcing even more jobs overseas. You can legislate all day long, doesn’t mean anything is changing.
Bankers, insureres, traders, and the financial jobs are again favored with this tax since they DO NOT ADD VALUE TO ANYTHING.
First to say that I do agree that the current system is extremely convoluted and at times requires a team of people just to figure out the wording on tax collection. However, I do not think that VAT charging 15% tax on mostly everything vs. current system with 5-10% tax that vary by location, will be a supported and adored system by the consumers. I personally do not see an easy way of transforming to a cleaner system such as VAT without some significant repercussions in the first decade or two it is put into place. As an example, think of paying taxes on a new car worth $30k. With current average rate at 6-7% the tax is roughly $2k (still managable); with 15% rate it goes up to $4.5k (not so attractive now). Apply this to other goods, real estate, etc., and you will have yourself a revolt. VAT will seem more like Value Added Trouble. Someone needs to really analyse the taxes that are collected from sales, income, etc., and then adjust the rates and tally up so that the effect of change is minimal for most of us and only those that have a lot to spend a lot are really affected. This however cannot be done without other systems such as medicine, pension, etc. in place and working as a good substitute to counter some of the effects of the change (less money in the pocket) on low and middle working classes.
Why do you try to disguise the fact that the VAT is still another TAX? I do not care if other countries have this tax. We do notwant–and do not want to be forced–to pay for Obama’s spending madness. He must stop spending OUR money.
Just what we need to keep the spending machine going. For a good review of the effects that a VAT would have on the US, please see: http://www.heritage.org/research/taxes/b g1852.cfm
A great majority of US population has been locked into a quarter-century dogma – government is bad, tax is bad, and giving money to governments is worse than being nuked.
So the country is marred in a debt hole so deep physicists can’t calculate using their black hole equations.
I wonder what would be the situation if the federal government cancels or withdraws all liquidity, free checks and bailout money so far delivered or committed to the private sector? That’s about $15 trillion.
To all the tax haters – give the $15 trillion of government money back in exchange for no tax increase. Take your private sector debt of about $15 trillion, add the $15 trillion returned, and enjoy your $30 trillion wonder hole. You’re on your own.
Sounds like a great way to start a civil war. We have enough trouble getting consensus on enough tax to keep our schools running. A VAT would be as popular as trying to force the country to turn Buddhist overnight.
Except of course those who take value rather than adding it own a Congress and Senate that will eat anything with enough money on it.
A VAT would be a viable option if and ONLY if at least 50% of the income tax that we already paid is completely cut. In other words, the Government would need to cut income tax by 50% to roughly 14% in order for this to be a viable option. Otherwise, you’re gonna have issues.
I don’t think anyone could ever sell Americans on a VAT, regardless of how it was implemented, especially since we’ve become such savvy web consumers.
If implemented, it would cause a huge black market and barter system in almost every sector of the economy. People already buy over the internet and cross state lines to avoid paying sales taxes. Fed Express and UPS would probably love this to pass since many people would start buying a lot of goods from companies outside of the US including sham companies in the caribbian that would just be fronts to funnel unsafe and untested products direct from China or where ever direct to consumer homes. Between that and underground flea markets and barter services, people would find a way not to pay tax for as much as they could.
That undercuts the ability to inspect or ensure safe products and sets up people to be ripped off by unscrupulous fly-by-night vendors of goods and services.
I think a VAT should be instead of an income tax. Collected on a graduated scale, that way the middle class and the poor won’t have to pay out such a large percent of their income. The best thing about a VAT is that everyone would then be a participant. ALL THE ILLEGALS and people who work under the table would now be contributing to the society they now take from. It just never seemed right to me that only the people getting an honest pay check should bear the weight of everyone else who doesn’t. That is a$$ backward, rewarding dishonesty and punishing the law abiding. Another tax that irks me significantly, is part of the property tax, where only property owners (mainly home owners) carry the largest weight of educating our young. ALL of society benefits from their education so ALL of society should help with that investment. I refer to mainly home owners, because big business is constantly being awarded HUGE TAX BREAKS as an incentive to move into a community.
Now, that city or county is receiving less income from property tax and so begins the decline of the schools and other important programs. It should be the other way around. A company should be required to benefit a community just as it states in most of our city and county bylaws. These laws that are no longer used. So I say again, a VAT should be in lieu of the income tax. I would much rather receive my full paycheck to spend where I choose instead of it being deverted to some corrupt politicians pet pork project. Of course at the onset there would have to be some tweaking to find the correct median between needs and affordability. Something that has gone OUT THE WINDOW, since the implementation of the tax LIE, we know as “trickle down economics”. It never trickled. In fact, (as our economy shows) it turned out to be a geyser in the opposite direction. I think a VAT would be easier to sell so long as it is not portrayed as an “us against them” tax, as is the case right now with the income tax plan. We are all in this together. This should be more of a patriotic cause than the “he has more so he should pay” crap. A country has needs and if we want them to met we ALL should contribute. We should not be demonizing the wealthy just as we should not be dumping on the less fortunate.
This goes for health care as well. Everyone should pay into the fund, not just the working who are lucky to have an employer that offers health insurance. A VAT would do this but we need a single payer fund that way all would be covered. I truly believe that the corruption in our political system is our major hurdle and a VAT would put a big dent in that corruption.
How about repealing the income tax and replace it with a sales tax on products and services capped as follows: 20% federal, 7% state, and 3% local? No exceptions on taxable items or organizations and no other government fees except for postage and legal fines.
I could agree with Swann, that perhaps there is a grain of sense in proposing a VAT — if he is willing to ALSO propose the elimination of all Federal Income taxes, and schedule the VAT so that it would be revenue-neutral with the lost income tax returns.
But, obviously, that’s not his game. What he wants is another revenue source for the DC bandits (Dems and Pubs) to spend on pork and special interests.
America needs to REDUCE the size and spending of our government, unless we are content to become just another run-of-the-mill “nanny state”, with a HUGE federal government controlling every aspect of our lives.
For the wealthy, there is apparently never enough.
Notice in the article it intimates that the US, “alone among rich nations is not charging a VAT,” ignoring the fact that the US, “alone among rich nations,” does not provide adequate universal health care coverage, job security, unemployment benefits, or in fact, any semblance of social network to its own people at all.
If comparisons are to be made to countries charging a VAT, we need to compare the entire economic burden and social benefit scope of taxes and benefits, not simply “cherry pick” those we like and discard the rest.
At this point, we barely have the benefits an average Chinese citizen has, and the Chinese government is working to improve benefits to their people, while our vaunted “Democracy,” which we are so eager to spread over the world, is not.
The American people need to start asking themselves “what’s wrong with this picture” and begin to do something about it before the wealthy completely destroy this country.
Gordon
1. The Federal government needs to trim back on all the things it pays for now. Many things should be funded by private parties who “believe in the cause” if they have the loot and want to fund them. And – the PayGo rule should be an amendment to the Constitution and enforced as law.
2. Sooner or later we’re going to have to shift to taxing what we consume instead of what we earn. Kill income tax and implement a “consumption” tax on everything but food. Only fair way to do it and it would generate more tax revenue.
3. Every corporation that does business on American soil and that falls into a certain revenue range should be putting part of their profits into a big fund for education – they’re the biggest beneficiaries of a well educated work force. And they should be paying bonuses based on their net profit.
M2C
heres another idea,,, just like those corporations that were bailed out with taxpayer money should have gone under… our government should be allowed to go under as well,,
they have exhibited their unableness to deal with , , , pretty much anything. i think its time for the people to take over.
if an employee fails to solve a company problem in a timely manner and a manner that conserves money,,, they wont hold the position very long at all,,, there is no need for government employees,,, including legislators,, to be any different.
Obama should “borrow a trick from Margaret Thatcher”? Ouch!
Hold on there a minute – doesn’t Obama already owe the American people up the wazoo for the change, less than a dollar, he failed to deliver? Indeed so. That and those bloody crooked bailouts.
Not to mention the people of Afghanistan, Iraq, Colombia, Cuba, Venezuela, Samoa and various other countries, plus the victims of Guantanamo to whom he owes a major apology, also to the people in The Hague an explanation for his reluctance to prosecute the criminals behind ongoing wars that have driven America decisively into the financial and moral toilet.
Obama’s already up to his ears in debt, all over the planet. At this point, his credibility’s completely shot and he’s no longer got any business borrowing anything from anybody. Not one red cent.
Besides which, The British Vampire was never exactly the most charitable person when it comes to working-class let alone dark-skinned individuals. Even if she were, the only trick that old bag’s got left in her is a big fat sweaty one for “Sir” Ronnie Reagan, in Hell.
Oh, and “Value Added Tax”? Only works where there is some vestige of a viable social contract between government and its people. The U.S. is not Norway – and it’s not even the U.K. – so in the United States, today, where there is no value to tax, VAT would amount to the shortest distance between once-proud America and all-out Class War.
Which, if you think about it, is kinda what Thatcher had in mind all along. Staked her career on it, didn’t she?
Bad advice, Chris. Try to do better next time.
Good article. It is simple to administrate and involves all classes of voters. As always, there will be one catch: Inland Revenues Services never scrap or decrease other taxes.
Where I come from this is the picture for a +- 70 year life expectancy scenario:
My marginal income tax rate = 30%; VAT 14%; Fuel levies <1%; Property tax <1%; Sin taxes <1%; Banking transactions <1% = operational taxes of <45%.
On the capital side: Property transfer duty = 8%; capital gains tax = 10%; donations tax = 20%. That is the ‘alive’ scenario.
The ‘death’ scenario: estate duty = 20%; executors duty 3.5%; trusts 40%.
All of this depends on tax structuring , but the mind boggles. On an operational level only, a ‘give’ away 45 percent of each unit earned, and I don’t get much for it.
That is why I don’t even bother voting, I can’t partake in something I don’t believe in. It is disgusting.
I’d be for a VAT on all imported goods except oil
There is a far better way to raise revenue – tariffs on imports. Until 1913, the federal government raised all of its revenue through tariffs. We didn’t even have an income tax at that time. Not only would tariffs provide a large stream of revenue, but they would also provide the motivation needed to restore domestic manufacturing and to reduce our use of foreign oil. If taxpayers don’t like the higher prices that would come with the tariffs, they can easily avoid them by buying American.
Of course, this would violate the rules of the World Trade Organization, but it’s high time that we withdrew from that organization anyway. The WTO and its rules are responsible for the persistent trade imbalances that collapsed the global economy.
It’s time to stop giving away a chunk of our economy tax-free to foreign companies and start making them pay their fair share.
As we all know taxes curb consumption and that is why in a period of a crisis you do not need to hinder consumption.
I would ask you to think the other way around instead of increasing government revenue through taxes, why don’t you cut government expenditure for example on military operations, amunitions and stuff like that?
The last thing the United States needs is another tax to give our already top-heavy government more money to waste on pork spending and programs hemorrhaging funds with little to no net-gain.
Cutting spending is the only solution that will sit well with the American public. As Swann pointed at, Americans have a very pointed revulsion for taxes on goods, and tend to blackball politicians who like to suggest them.
I’ve got a better idea. How about we get rid of the 20 million illegal aliens who are sucking the life out of this country? That would ease the burden on healthcare, education and social services, it would also reduce crime and ease the burden on our criminal justice system. Then, we could stop sending billions of dollars to foreign countries who don’t appreciate it. We don’t need more taxes! Do you really believe that if this VAT passed, that it would go to cutting the deficit or paying our debts? Of course not! It would be spent on more useless and wasteful programs designed to benefit those who contribute the least to our society!
Taking more money from americans so the government can dole it out to who they want to sounds like a great idea. We would also get to pay for the bureacracy needed to execute the collection of the money and the spending of it. That’s way better than just keeping the money I work for. END SARCASM. The author is an idiot. I have no clue how he continues to get his work in Rueters.
In principal VAT plus a lower income tax is fine in most countries but not a federal model where states pursue different tax strategies. I live in New York City -my tax’s are as follows:
Federal: 35%
State Income: 6.5%
City Income: 3.4%
State Sales: 8.5%
City Sales: 4.5%
Property Tax: 15.7%
I simply cannot pay VAT – Ill just buy more from the black market and forgo a full receipt – which I allready do in any of many shops in New York that get around full sales tax or buy online in other countries.
this commentary does a great disservice to the vat system that is absolutely great. vat should not be used to raise taxes but to adapt taxation to a modern economy. vat is a consumption tax that exempts investments from taxation and put manufacturing and services on an equal footing.
Enough of the taxes. This country was founded on a revolt about taxes. Stop publishing this double speak. Think of how far the USA has gotten without a VAT.
Gee !!! Such great ideas I’ve read here, but …. the one idea that appears to be missing is – WHY NOT GET RID OF THE BLOATED, BLOOD-SUCKING GOVERNMENT ITSELF. Why do we need all the Czars, Federal Gov’t Agencies and Federal “so-called” programs – none of which work worth a damn except to create “make-work” for a vast group of unemployables. If the Federal Government returned to what was initially created by the founding fathers, then we would have such usless entities as the Dept. of Education, among others.
As for those who “work” for these usless Fed Agencies – let them go out and compete for a real job. If they can’t hack it, then you know what you were paying for from when they Fed employees …. NOTHING !!! You may as well as taken your tax dollars and put them in the fireplace. At least then you would have received something in return for your money.
The thing that is truly astonishing is how we, as a Nation, have become so blithely accepting of being robbed by politicians that instead of demanding accountability from the poor stewards of our public trust, we apathetically shrug our shoulders and think that robbing ourselves with a VAT will cure our ills. Have we become that pathetic?
Why do we always concentrate on finding ways to pay for wasteful spending via VAT, taxes on sugary product or other tax gimmicks instead of addressing the problem at hand – the spending? Cut back on these ridiculous $200M planes and $2.2 Billion bombers and you can cut $100B/year from the defense budget: Voila! there’s your $1 Trillion dollars to pay for universal health care over 10 years.
Sorry but if my lip is bleeding on a daily basis, I don’t try to find out which is the best bandage solution and how I could best pay for it. I simply try to get it treated once and for all and stop the problem at the root instead of having to find new and more expensive remedies every day.
How do we get rid of ignorant people like Christopher? It’s his ignorance and ability to reach the masses that has gotten us into so much fiscal trouble today. Another tax? What an idiot!
If they do this when so, so, so so many people support the http://www.fairtax.org instead, then I would have to say something is wrong and they are not working for the people anymore.
the so called experts are the ones who think its needed then they should pay it.for the rest of us we are fed up with the corruption and partisanship of the goverment i want out thank you. the freedoms we had are gone now they want to tax us more then bite me
One of the primary reasons Europe does not experience the same level of growth as the US is the VAT. More government is not the model for improving our country. The correct approach to current and looming deficits is to spend less. More money flowing through Washington DC means more power. The politicians already have too much power over our economy and personal lives.
The point of public policy is not to protect Obama and the democrats.
The only acceptable tax is one that everyone can see all the time. The VAT fails because it is largely hidden in the final retail price. The FairTax would a) replace the existing income tax completely and b) be printed on every receipt in full at the point of retail sale.
Peter and William, why don’t you play the ball rather than the man ? While you figure that one out, look up the meaning of ‘Socratic irony’ and the spelling of Reuters. Only the Western Hemisphere reads our $hi+ in any case, so that cuts out 4 billion of the masses.
Well done to the author.
VAT is a bad idea, no wait, a horrible idea. Why would taking more of our money help anything? Let’s try capping government spending and halt the bail out of the private sector instead of increase taxes and the size of our government. Why not let capitalism work by supporting the middle class and small business? New taxes will only give the average citizen another reason to stop spending money in an already ailing economy.
LOL. America is soooo overdue for a Bastille Day.
A straight forward flat sales tax across the board would be much easier and less complicated. It also assures that EVERYONE pays their fair share in taxes since it’s based on consumption. Eliminate the income tax all together. But the rich don’t like it because they don’t want to pay anything in the way of taxes. And since the rich have more money to spend they would pay a naturally heavier portion of taxes simply because they can and will spend more.
And if making financial gains is the only motivation for a new tax, then one needs to ask just what those tax dollars would go to. Would they go to serving the interests of the citizen, or will the tax money simply be another vehicle to power spending initiatives that favor relatively few members of society?
Take a portion of the tax money collected from a flat sales tax and redistribute it back to the population equally. This will help to keep a consistent low level stimulus in place for citizens which they can use to help them achieve their individual goals.
It is acceptable when we as citizens pay for the crimes of the business sector. It’s time the citizen was taken care of as well. If it’s okay to force a citizen to pay for corporate crime by way of taxation, then it is reasonable that the citizen should also be invested in. We are the “backbone” of the American economy. So why are we constantly being bent over when we should be standing tall?
Casper you included a space after man and before your question mark. But keystroke error’s and misspellings don’t detract from either one of points. I’m just not sure what exactly your point is. You didn’t state one. “Well done to the author.” Was that it? So much for the playing the ball. Idiot.
The person or persons who wrote this must work directly for Obama.
Eminetly sensible and well reasoned. However poor old Jon doesn’t seem to understand bless him! As a regressive tax its one that Republican think Tanks have been touting for years and ethically its anathema for the Dems. Politically however it makes sense; a one off hit to the inflation figures and then the tax hike is forgotten about; in Britain Thatcher is still remembered as a tax cutter, even though her first act on gaining power was to double VAT. How quickly people forget.
I think Jon in wrong. I did not get an indication of the author’s political affiliation…in fact this article could have been written by a republican trying to make the VAT seem like a great idea while knowing it would surely sink Obama’s chances for re-election. And more to the point, why didn’t the author discuss the negative sides of implementing a VAT. Perhaps we should be less concerned with the author’s political bedfellows and more concerned with the fact that we don’t have a counter-point against which this piece could be compared.
This would be a huge slap in the face to those of us who saved all our lives, foregoing early fun for future security. We sacrificed and saved BECAUSE we assumed we’d get to use the savings in our old age. Our savings have already gone through the wringer of income taxes, and we accepted that. But passing them through an additional trimming-by-VAT wouldn’t leave us much reward for all that effort and doing-without. If the government lowers income taxes, our previously-saved money would not benefit from that part – only younger people would. I hope all baby-boomers realize that they’d bear the brunt of the switch, directly on their life’s savings. I hope all younger people realize that if the baby-boomers become unexpectedly poorer by VAT trimming their savings, younger people will have to pay for their parents, unless they prefer to just watch them suffer. It’s a lose-lose tax situation.
‘counter-point’ = all these vicious commentaries.
A tax is a tax is a tax. the American people will punish the legislators that stick this hand into their wallets.
Since American capitalism has failed so badly of late, and the only thing that has kept us out of the Second Great Depression is government spending, we do need to come up with new sources of revenue. I always get a laugh when I read a post from someone who says we need to cut spending and let the markets fix the problem. Where have these people been the past two years? I don’t know if they’re delusional or merely poorly educated and misinformed simpletons. I’m not wild about another tax, but I’m a realist who doesn’t buy into the “efficient market” school of economics. Government is the only friend the average American has these days, and we need to fund that government properly or watch our standard of living deteriorate to third world levels. Look at the cash for clunkers program (that’s right, a gov’t. program) — people ran out to buy new cars only because the rich Uncle Sam ponied up the cash. Where did that money come from?
Listen closely, the USA is not going back to business as usual. Why? Because there are no more good jobs being created here (ask any recent college grad), America doesn’t make anything the world wants to buy, easy credit is now an historical footnote, and real unemployment is closer to 16% than it is to 10%. Go to any large city in the USA and you’ll see that the beggars are back.
In response to Carole, yes it would be a slap in the face, but lets face it America is broke! Its not a question of whether new and higher taxes will come (of course we’d rather they didn’t), but of what form those taxes will take. Do you target earned income, capital gains or expenditure ‘cos lets face it; someone’s going to pay.
How about a tax on gasoline prices? It is done here in Canada. It makes poeple conserve energy and the funds go back into the economy. Therefore the US would have less money going out of the country to “foreign oil” and more money stays in the country. It will reduce the price oil due to lower demand. It will stimulate purchase of economical cars. Will reduce emissions as well. This would be an easier win for Obama than pushing for the VAT tax.
The VAT and Sales Tax proposals both assume the American consumer will be able to pay these bills. There are too many former consumers who are unemployed, underemployed or underpaid with little hope for improvement. Most of the middle class have learned they have to reduce debt and increase savings for their own economic survival.
That leaves just the affluent and wealthy to go out and consume for the whole country! I’m not holding my breath waiting for that.
Take a look at the tent cities, rising unemployment, foreclosures, and ask if the politicians have any grasp of the real world the rest of us live in. Money moves from one person to another, it is not grown on trees. So take from the poor and middle income and give to the politicians and their cronies…and how would the taxed citizen benefit ? Let us see; as a middle income person, I received NO stimulus check, NO tax credits to purchase a home, NO clunker credit since I walk to work and have no car, and I can look forward to more taxes. It should not be business as usual starting with cleaning up the big spenders and waste in government.
Photos showing the impact of wasteful and excessive government spending:
http://www.nytimes.com/slideshow/2009/03 /25/us/20090326-TENTS_3.html